When Size Matters

As of late, three of Canada’s best mutual fund managers are behaving rather strangely–they’re saying “No” to new investors. Their reasoning is simple–size matters, only in reverse, whereby less money under management often means better performance.

The managers in question are Eric Sprott of the Sprott Opportunities Hedge Fund, Tom Stanley of the Resolute Growth fund, and David Vanderwood of the Burgundy Asset Management. All three manage funds with under CDN$300.0 million and all three have recently slammed the door right in the noses of new investors, who were literally banging on their doors.

Aside from refusing new customers, this dynamic trio has something else in common: they’re not phased much by what has been going on as of late in Canada’s stock market. In spite of Canada being the “it” place when it comes to investment potential, our stock market is simply vanishing before our eyes. It started about two years ago with CP Ships, then Fairmont Hotels, Dofasco, and Molson, to more recent takeovers of Placer Dome, Falconbridge and Inco.

Most fund managers have opted for an easy road, which is to invest their assets in large caps and avoid all the hard work of researching smaller companies. But, when you want to buy a large cap, that on any average day trades millions of shares, you can do it only if you’re big enough to meet high capital requirements. Also, even if managers of large funds wanted to buy a small cap, in order for that investment to make a dent in their bottom line, they would almost have to takeover that company.

So, perhaps part of the problem is not the vanishing stock market in Canada, but rather Canadian mutual funds getting too big for their own good, and that of investors. This is also why Sprott, Stanley, and Vanderwood are not terribly bothered by the recent exodus of large caps from Canada.

Of course, just keeping a fund small is not enough. As with any good thing, there is a catch. It requires a special talent to (guess)timate just how small a small fund should be. Obviously, the three managers in question have it, judging by the performances of their funds, unlike, alas, the majority of their peers.

By not having the right skills to run their funds, it seems to me that most Canadian managers also lack vision–the one that would help them navigate their way through the shrinking stock market in Canada. So, for investors out there looking to invest in a mutual fund, look for smaller funds, with asset value of less than half a billion dollars. Also, check out the fund managers’ track records, how long they have been in the business, their investment styles, etc. It pays to be informed about such things, just as thinking small can result in huge profits.